Mindanao State University
College of Business Administration and Accountancy
DEPARTMENT OF ACCOUNTANCY
Marawi City
FUNDAMENTALS OF ASSURANCE SERVICES
Accounting 151
NATURE OF ASSURANCE ENGAGEMENTS
Assurance engagements are those engagements in which
a practitioner expresses a conclusion designed to enhance
the degree of confidence that intended users can have
about the evaluation or measurement of a subject matter
that is the responsibility of a party, other than the intended
users or the practitioner, against criteria.
A. Assurance services 
services  are independent   professional
services intended to enhance or improve the
credibility or quality of information to meet the
needs of an intended user, i.e., decision making.
B. Assurance refers
Assurance refers to the practitioner ’s’s satisfaction as
to the reliability of an assertion being made by one
party for use by another party. It is the degree of
certainty the practitioner has attained and wishes
to convey to intended users.
C. Subject matter information 
information   is used to mean the
outcome of the evaluation or measurement of
subject matter. It is the subject matter information
about which the practitioner gathers sufficient
appropriate evidence to provide a reasonable
basis for expressing a conclusion in an assurance
report.
Objective of Assurance Engagements
The objective of an assurance engagement is for a
professional accountant to evaluate or measure a subject
matter that is the responsibility of another party against
identified suitable criteria and to express a conclusion that
provides the intended user with a level of assurance about
that subject matter. An assurance engagement is
conducted:
A. To provide a high level of assurance that the
subject matter conforms in all material respects
with identified suitable criteria; or
B. To provide a moderate level of assurance that the
subject matter is plausible in the circumstances.
ELEMENTS OF AN ASSURANCE ENGAGEMENT
An assurance engagement should exhibit the following
elements:
A. A three party relationship involving a practitioner, a
responsible party and intended users.
Assurance engagements always involve three
separate parties:
 Practitioner  – 
 –  the
  the person who provides the
assurance to intended users about a
subject matter that is the responsibility of
another party. This is the CPA in public
practice that performs the assurance
engagement.
The term practitioner 
practitioner  is broader than the
term auditor as used in professional
standards which only refer to practitioner
performing audit or review engagements
with respect to historical financial
information.
 Responsible party  –   the person or persons
Important Notes:
 The responsible party and the intended
user will often but not necessarily be from
separate organizations.
 The practitioner may be engaged by the
responsible party or the intended user.
 The responsible party can be one of the
intended users but not the only one.
 The intended user may be established by
agreement between the practitioner and
responsible party or those engaging or
employing the practitioner.
 In some circumstances, the intended user
may be established by law.
B. An appropriate subject matter.
The subject matter refers to the information to be
evaluated or measured
measured against
against the
the criteria. The
subject matter and the subject matter information
of an assurance engagement can take many
forms, such as:
 Financial performance or conditions (for
example, historical or prospective financial
position, financial performance or cash
flows) for which the subject matter
information may be the measurement,
presentation and disclosure represented in
the financial statements.
 Non-financial performance or conditions
(for example, the performance of an entity)
for which the subject matter information
may be key indicators of effectiveness and
efficiency.
 Physical characteristics (for example,
capacity of a facility) for which the subject
matter information may be a specifications
document.
  Systems and processes (for example, an
entity’s internal control or IT system) for
which the subject matter information may
be an assertion about effectiveness.
 Behavior  (for example, corporate
governance, human resource practices
and compliance with regulation) for which
the subject matter information may be a
statement of compliance or a statement
of effectiveness.
For a subject matter to be considered appropriate,
it must be identifiable, capable of consistent
evaluation or measurement against suitable criteria
and in a form that can be subjected to procedures
for gathering evidence to support that evaluation
or measurement.
C.  Suitable criteria.
Criteria 
Criteria  are the benchmarks used to evaluate or
measure the subject matter, including where
relevant, benchmarks for presentation and
 or recognized bodies of experts that follow
a transparent due process.
  Specifically developed  –   those designed
specifically for the purpose of the
engagement.
Suitable criteria exhibit the following characteristics:
 Relevance –   relevant criteria contribute to
conclusions that assist decision making by
the intended users.
 Completeness  –   criteria are sufficiently
complete when relevant factors that could
affect the conclusions in the context of the
engagement circumstances are not
omitted.
 Reliability – reliable criteria allow reasonably
consistent evaluation or measurement of
the subject matter when used in similar
circumstances by similarly qualified
practitioners.
 Neutrality  –  neutral criteria contribute to
conclusions that are free from bias.
 Understandability –  understandable criteria
contribute to conclusions that are clear,
comprehensive and not subject to
significantly different interpretations.
The evaluation or measurement of a subject matter
merely on the basis of the practitioner’s own
expectations, judgments and individual experience
would not constitute suitable criteria.
Suitable criteria are context sensitive, that is,
relevant to the engagement circumstances. Even
for the same subject matter there can be different
criteria.
Whether established or specifically developed,
criteria need to be available to the intended users
to allow them to understand how the subject
matter has been evaluated or measured. Criteria
are made available to the intended users in one or
more of the following ways:
 Publicly.
 Through inclusion in a clear manner in the
presentation of the subject matter
information.
 Through inclusion in a clear manner in the
assurance report.
 By general understanding, for example the
criterion for measuring time in hours and
minutes.
Criteria may also be available only to specific
intended users, for example the terms of a
contract, or criteria issued by an industry
association that are available only to those in the
industry.
D. Sufficient appropriate evidence.
The practitioner plans and performs an assurance
engagement with an attitude of professional
skepticism to obtain sufficient appropriate evidence
about whether the subject matter information is
free from material misstatement. Evidence refers to
the information obtained by the practitioner in
arriving at the conclusions on which the conclusion
is based.
The practitioner also considers materiality,
assurance engagement risk and the quality and
assurance engagement rarely involves the
authentication of documentation, nor is the
practitioner trained as or expected to be an expert
in such authentication.
 Sufficiency and Appropriateness of Evidence
 Sufficiency  is the measure of the quantity of
evidence. The quantity of evidence is affected by
the risk of the subject matter information being
materially misstated (the greater the risk, the more
evidence is to be required) and the quality of such
evidence (the higher the quality, the less may be
required).
 Appropriateness  is the measure of quality of
evidence, that is, its relevance and reliability. The
reliability of evidence is influence by its source and
by its nature.
The sufficiency and appropriateness of evidence
are interrelated. However, merely obtaining more
evidence may not compensate for its poor quality.
Generalizations on Reliability of Evidence
The following generalizations about the reliability of
evidence may be useful, though exceptions to
these generalizations may exist:
 Evidence is more reliable when it is
obtained from independent sources
outside the entity.
 Evidence that is generated internally is
more reliable when the related control is
effective.
 Evidence obtained directly by the
practitioner is more reliable than evidence
obtained indirectly or by inference.
 Evidence is more reliable when it exists in
documentary form, whether paper,
electronic or other media.
 Evidence provided by original documents
is more reliable than evidence provided by
photocopies or facsimiles.
The practitioner ordinarily obtains more assurance
from consistent evidence obtained from different
sources or of a different nature than from items of
evidence considered individually.
Cost-Benefit Considerations
The practitioner considers the relationship between
cost of obtaining evidence and the usefulness of
the information obtained. However, the matter of
difficulty or expense involved is not in itself a valid
basis for omitting an evidence gathering
procedure for which there is no alternative.
 Assurance Engagement Risk and Materiality
The risk that the practitioner expresses an
inappropriate conclusion when the subject matter
information is materially misstated is referred to as
the assurance engagement risk . The higher the
assurance engagement risk is, the more extensive
the evidence gathering procedures are.
Assurance engagement risk has the following
components:
 Risk of material misstatement  –   the risk that
the subject matter is materially misstated. It
consists of:
a. Inherent risk  –   the susceptibility of
the subject matter information to a
 Materiality  is relevant when the practitioner level  in the circumstances of the engagement as
determines the nature, timing and extent of the basis for a  positive form  of expression of the
evidence gathering procedures and when practitioner’s conclusion.
assessing whether the subject matter information is These engagements provide a high, but not
free of material misstatement. When considering absolute, level of assurance. This is also known as
materiality, the practitioner understands and  reasonable assurance  which is achieved if the
assesses what factors might influence the decisions assurance engagement risk is reduced to an
of the intended users. Assessing materiality is a acceptably low level, that is, close to zero.
matter for practitioner’s judgment.
Example: Independent financial statement audits.
E. A written assurance report in the form appropriate
B. Limited assurance engagements  –   aim to reduce
to a reasonable assurance or limited assurance
assurance engagement risk to an acceptable level
engagement.
in the circumstances of the as the basis for a
The practitioner provides a written report containing negative form of expression of the practitioner’s
a conclusion that conveys the assurance obtained conclusion. Thus, the assurance engagement risk in
about the subject matter information. In addition, a limited assurance engagement is greater than for
the practitioner considers other reporting a reasonable assurance engagement.
responsibilities, including communicating with those
These engagements provide a moderate level of
charged with governance when it is appropriate to
assurance. This is also known as limited assurance
do so.
which is achieved if the assurance engagement
In reasonable assurance engagements, the risk is reduced to an acceptable level.
practitioner expresses the conclusion in the positive
Example: Review of financial statements.
form, for example:
“In our opinion internal control is effective, in all ABSOLUTE ASSURANCE IN ASSURANCE ENGAGEMENTS
material respects, based on XYZ criteria.” Reducing assurance engagement risk to zero is very rarely
In limited assurance engagement, the practitioner attainable or cost beneficial as a result of factors such as
expresses the conclusion in the negative form, for the following:
example: A. The use of judgment in gathering and evaluating
evidence and forming conclusions based on that
“Based on our work described in t his report, nothing
evidence.
has come to our attention that causes us to believe
B. The use of selective testing.
that internal control is not effective, in all material
C. The inherent limitations of internal control.
 respects, based on XY Z criteria.”
D. The fact that much of the evidence available to
Not all conclusions are unqualified conclusions or the practitioner is persuasive rather than conclusive.
those with no categorization in the expression of E. In some cases, the characteristics of the subject
the practitioner’s conclusions. matter when evaluated or measured against the
Cause Conclusion identified criteria.
If material but not TYPES OF ASSURANCE ENGAGEMENTS  –  STRUCTURE
Auditor is prevented from
pervasive, qualified
obtaining sufficient A. Assertion-based engagements  –   those that involve
conclusion. If both
appropriate evidence the evaluation or measurement of the subject
material and pervasive,
(scope limitation)
disclaimer of opinion. matter by the responsible party and the subject
If material but not
matter information in the form of an assertion by
Assertion or subject pervasive, qualified the responsible party is made available to the
matter information is conclusion. If both intended users. The practitioner’s conclusion can
materially misstated material and pervasive, be worded in terms of the responsible party’s
adverse opinion. assertion. These are also known as attestation
Criteria are unsuitable or If material but not engagements.
subject matter is pervasive, qualified B. Direct reporting engagements  –   those where the
inappropriate thus conclusion. If both practitioner either directly performs the evaluation
misleading users of material and pervasive, or measurement of the subject matter or obtains a
information adverse opinion.
representation from the responsible party that has
Important Notes: performed the evaluation or measurement that is
not available to the intended users. The subject
 The reason for differing levels of assurance
matter is provided to the intended users in the
lies in the nature, extent and timing of
assurance report.
procedures to gather evidence as a basis
for the practitioner’s conclusion. RANGE OF ASSURANCE ENGAGEMENTS
 Whenever practical, the assurance report There is a broad range of assurance engagements, which
is addressed to all the intended users, but includes any combination of the following:
in some cases there may be other A. Engagements to report on a broad range of
intended users. In cases where the subject matters covering financial and non-
practitioner may not be able to identify all financial information.
intended users, the intended users may be B. Engagements intended to provide high or
limited to major stakeholders with moderate level of assurance.
significant and common interests. C. Attest and direct reporting engagements.
 When identified criteria are available only D. Engagements to report internally and e xternally.
to specific intended users, or are relevant E. Engagements in private and public sector.
 COMPARISON AMONG THE DIFFERENT TYPES OF SERVICES

ASSURANCE SERVICES RELATED SERVICES

POINT OF
DISTINCTION  Agreed-upon
 Audit Reviews Compilation
Procedures
To report whether To assist the client in
To perform audit
anything has come to preparing financial
To express an opinion on procedures agreed on
the auditor’s attention statements by using
Objective the fairness of financial with the client and any
that causes to believe accounting expertise as
statements appropriate third parties
that the financial opposed to auditing
identified in the report
statements are not fair expertise
Risk assessment
Reading of the financial
Evidence gathering procedures, tests of Limited to inquiry and
Procedures as agreed statements for obvious
 procedures control and substantive analytical procedures
misstatements
procedures
Level of assurance Reasonable or high but Moderate or limited
No assurance No assurance
 provided not absolute assurance assurance
An audit report An review report
A compilation report
containing a positive containing a negative A factual findings of
Report provided which identify
form of assurance on form of assurance on procedures
information compiled
assertion assertion

 Skills used Audit skills Audit skills Audit skills Accounting skills
Recipients of the report Users derive benefit
Audit opinion enhances Substantially less in must form their own because the service has
Other
the credibility of scope of procedures conclusions and the been performed with
Characteristics financial information than audit report is restricted to due professional skill
contracting parties and care